Unequal Benefits

Are you unknowingly discriminating against your key executives with your current benefit plan structure? Company benefit plans can cause unintended reverse discrimination against highly compensated employees, whether by plan design or regulatory limitations.

How is this possible? The statutory contribution limits on qualified retirement plans, and caps on group disability and life insurance create gaps that make these programs less effective for higher-earning employees.

For example, let’s compare two employees who are both maxing out their 401(k) contributions at $23,000 per year — the limit for 2024. Employee A makes $95,000 annually and the maximum contribution represents 24% of their annual income. Employee B makes $350,000 annually, and the maximum contribution represents 6.5% of their annual income.

A standard financial planning rule of thumb suggests that employees will need approximately 70-80% of their pre-retirement income to maintain their standard of living in retirement. Employee A, saving 24% of their income each year, has a much higher probability of hitting that goal. In contrast, Employee B may only be able to replace 30-50% of their salary. This stark difference creates a significant retirement income gap.

By taking the proactive step of implementing an Executive Benefit Solution, you can effectively address this shortfall. Since Executive Benefit Plans are not governed by the same rules as 401(k) plans, they generally offer pre-tax savings opportunities with no cap on contributions. This not only provides your high value executives with greater savings opportunities, but also enhances your company’s ability to retain key personnel by demonstrating this additional value.

Let’s face it, turnover at the executive level is difficult. The direct costs to replace a highly compensated executive are estimated to be 200% of the annual salary for that position. So, attracting and retaining high-level talent is crucial.

Have you thought about how your company will address this situation? RPS can help! Not only do we provide 3(38) fiduciary advisory services for employer-sponsored 401(k) plans, but we can help design an Executive Benefits Plan that will solve the above issues and make your executives feel more valued.